After publishing our article on insider selling going on at AeroGorw, we received a question from a few readers: "What is a Form 4?" Well, we can't really answer that fully without adding two similar Forms to the lesson.
Directors, officers, and owners of more than 10% equity of a share class any public company registered under the '34 Act are required to report their purchases, sales and holdings of the company's securities via 3 different forms.
These 3 filings work to provide transparency for investors offering valuable information about the companies they hold and how the insiders are viewing the prospects of the company. As defined by the SEC the three insider transactions forms that investors should watch are:
Form 3: "When a person becomes an insider (for example, when they are hired as an officer or director), they must file a Form 3 to initially disclose his or her ownership of the company’s securities. Form 3 must be filed within 10 days after the person becomes an insider."
Form 4: "In most cases, when an insider executes a transaction, he or she must file a Form 4. With this form filing, the public is made aware of the insider’s various transactions in company securities, including the amount purchased or sold and the price per share. Form 4 must be filed within two business days following the transaction date. Transactions in a company’s common stock as well as derivative securities, such as options, warrants, and convertible securities, are reported on the form. Each transaction is coded to indicate the nature of the transaction."
Form 5 : "A Form 5 is generally due to the SEC no later than 45 days after the company’s fiscal year ends and is only required from an insider when at least one transaction, because of an exemption or failure to earlier report, was not reported during the year. For example, some transactions, such as certain purchases by an insider of less than $10,000 in a six-month period, don’t have to be reported on Form 4 when they occur but do have to be reported on Form 5. The Form 5 filing doesn’t have to disclose transactions that have been previously reported. When reporting transactions on Form 5, insiders use the same transaction codes as when reporting on Form 4."
Form 4 and 5 refer to transaction codes on the filing to say whether shares were acquired or sold, whether options were exercised and more. The transaction codes needed to decode any Form 4 such as the aforementioned that were filed by insiders of AERO are as follows:
A: Grant, award, or other acquisition of securities from the company (such as an option).
K: Equity swaps and similar hedging transactions.
P: Purchase of securities on an exchange or from another person.
S: Sale of securities on an exchange or to another person.
D: Sale or transfer of securities back to the company.
F: Payment of exercise price or tax liability using portion of securities received from the company.
M: Exercise or conversion of derivative security received from the company (such as an option).
G: Gift of securities by or to the insider.
V: A transaction voluntarily reported on Form 4.
J: Other (accompanied by a footnote describing the transaction).
Before investing in marijuana stocks, traders and investors may want to look towards insider ownership and insider transactions to better consider what stake they have in the current and continued success of the company.
This is known to many as 'having skin in the game' and can offer useful insight.
For a more in-depth explanation on the SEC Form 3, Form 4 and Form 5, download the SEC's investor bulletin here.